A cyclical deficit occurs when
A)there is a deficit due to the fact real GDP is less than potential GDP.
B)government outlays are greater than revenues.
C)there is a deficit due to the fact real GDP is greater than potential GDP.
D)there is a deficit even when real GDP equals potential GDP.
E)government outlays are less than revenues.

Question

Quizplus · Accepted Answer

A cyclical deficit occurs when there is a deficit due to the fact that real GDP is less than potential GDP. This means that in times of economic downturns or recessions, government revenues typically decrease (e.g. through decreased tax collections) while government outlays (e.g. in the form of unemployment benefits) increase, leading to a budget deficit. As such, a cyclical deficit is typically the result of shifts in the business cycle, rather than structural issues with the budget itself.

A Cyclical Deficit Occurs When